Blair and Brown split over Budget plans

Tony Blair and Gordon Brown were deeply divided last night over the Chancellor's plans to make inflation-busting increases in tax credits the centrepiece of his forthcoming pre-Budget report.

As Downing Street last night denied reports that relations between the Prime Minister and his Chancellor had sunk to an all-time low, The Independent on Sunday learnt they are engaged in a dispute over the Chancellor's strategy for the Budget.

The IoS can reveal that the Chancellor is planning a big increase in the tax credits for poorer working families, children and pensioners in his pre-Budget report on 27 November. No 10 fears the impact of such "invisible" measures will be lost on the general public.

Mr Blair is backing cabinet ministers who are demanding increases in their budgets for schools, education and law and order to convince people that the Government will deliver on its election pledges.

Last night the cabinet tensions were laid bare in a BBC TV documentary, Mo Mowlam, the former Northern Ireland minister, saying they were "crippling the Government". She said: "When you have two people that weren't working together, and that's the Prime Minister and the Chancellor, it doesn't lead to positive, easy decision-making." John Prescott, the Deputy Prime Minister, dismissed her as "daft".

Behind the jealousies around the cabinet table, there has been growing alarm in Downing Street about Mr Brown's frustration at Mr Blair's reluctance to give up the premiership. Mr Brown's allies were furious when Downing Street briefed one national Sunday newspaper, wrongly, that Mr Brown was going to increase taxes in the Budget to pay for the war in Afghanistan. They also accuse Downing Street aides of promoting David Blunkett as a future Prime Minister to try to block Mr Brown's ambitions.

Last night the Chancellor's spokesman dismissed reports of the breakdown in their relations as "poisonous and irresponsible tittle-tattle". He said the claims that there was a rift over spending were also "irresponsible gossip". He added: "Both the Chancellor and the Prime Minister want to see improvements in public services at the same time as achieving the Government's goal of abolishing child poverty in a generation."

Cabinet ministers are threatening a revolt because they share Downing Street's view that the extra money raised in the Budget next spring should be put into immediate increases in spending on schools and hospitals rather than tax credits for which the Government gains little praise.

"There is growing frustration that Gordon is putting the money into tax credits, which are almost invisible. We have got to make sure that there is more public investment," said a senior Whitehall source.

One of the Chancellor's allies hit back at No 10, dismissing their criticism as an "old Downing Street chestnut". "Gordon fought the election on a commitment to increase public spending. The idea that he is not in favour of higher public spending is ridiculous."

Mr Brown will use his Budget to plug gaps in his finances caused by a fall in growth, allowing borrowing to rise to pump more money into the economy. He is reviewing long-term spending plans, but his focus will be on boosting the economy by putting more cash back into people's pockets through tax credits.

Estelle Morris, the Education secretary, and Alan Milburn, the Health secretary, are bidding for budget increases to overcome the recruitment crisis in schools and hospitals. Stephen Byers, the Transport secretary, faced with rising costs on the railways for the takeover of Railtrack, and the Home Secretary, David Blunkett, are also seeking more.